On this page
What higher interest rates do to buying power
How do interest rates affect buying power when you’re searching for your next home? Will you have to settle for a less-nice house if mortgage rates rise?
The simple answer is that the higher your mortgage rate is, the higher your monthly payments are going to be.
So, yes. You really will get less home for your money if mortgage rates go up appreciably. That could mean a smaller place, or one in a less desirable neighborhood, or one that needs improvements or upgrades.
See what mortgage rate you can receive with your credit score, income, and purchase price.
How much buying power do you lose when interest rates rise 1%?
What most shoppers don’t realize is how dramatically their buying power shrinks when interest rates rise by relatively small amounts.
Let’s imagine you had $1,200 per month to spend on your principal and interest payment. (Keep in mind this number doesn’t include things like property tax, insurance, mortgage insurance, or HOA dues).
That $1,200 per month goes a shorter way when rates are higher. For instance, Freddie Mac’s 30-year fixed rate averaged 7.32% on October 22, 2026. At that rate, you could buy a house for about $218,000 if you had 20% down. But let’s say rates rise to 8.32%, 1% higher than you planned.
Now you are limited to a purchase price of about $198,000, again assuming 20% down. That’s a 9.2% reduction in buying power and about $20,000 shaved off your maximum purchase price. At $1,800 per month and 20% down, you could buy a home for about $328,000 with a 7.32% interest rate. But at 8.32% your maximum home price is now about $298,000, a 9.2% reduction in buying power. When rates were lower, the same 1% rise did more damage. At 4.5% to 5.5%, buying power fell by about 10% to 11%.
At the lower end of the spectrum, $1,000 per month would buy you a $182,000 home at 7.32% but just a $165,000 home at 8.32%. That’s a 9.2% reduction. In some areas, it could make the difference between getting into a home or not, or settling for less house.
An increase in interest rates could harm your buying power as much as rising home prices. If rates increase by 1%, the effect for buyers is similar to a home price rise of about 10%.
High Rates Affect High Loan Amounts the Most
At higher purchase prices, the sheer dollar amount that rising rates shave off your purchase price is pretty incredible.
You could buy a home for about $455,000 at 7.32% if your budget were $2,500 per month. But at 8.32%, your purchase price is about $413,000, a reduction of about $42,000.
At a $3,000 per month payment, a 1% increase in rates cuts your maximum purchase price by about $50,000.
These are big numbers. They could affect your ability to get into the home you wanted, or into a home at all in higher-priced areas.
Choosing when to buy
The simple truth is that if rates go up, you will qualify for less of a home. A shift of 9% to 11% in buying power is often the difference between an extra bedroom or an older home versus a newer one.
If rates are low enough to make the home you want accessible, it’s best to pull the trigger and buy. Of course, you need to take a look at your economic stability. Also weigh your plans to stay in one spot for at least 7 years. Say you’re fairly certain you can handle a home, and rates look good, but you’re still waiting. In that case, consider moving up your plans to start looking for a home and getting prequalified for a home.
Your options if rates go up
Buying a home while rates are lower is the best option for home shoppers. But there are other options to help other potential homebuyers qualify for the same price point home at a higher rate. These include a larger down payment or adding a non-occupant co-borrower to the loan. A 5- or 7-year adjustable-rate mortgage (ARM), which often starts with a lower rate than a fixed-rate loan for the first five or seven years, might bring a more expensive home back into reach. Another possible option is an 80/10/10 piggyback mortgage which could allow you to finance part of a larger down payment.
Long term rates forecast
It might be a mistake to treat mortgage rates’ behavior during the 2010s as a long-term guide. That’s because that decade was anomalous by historical standards.
If you spend a little time on Freddie Mac’s archive of 30-year, fixed-rate mortgage rates, you can go back to 1971. And, for most of that time, things were very different from how they were during the 2010s.
From 2010 through 2019, average rates for these mortgages stayed within a fairly narrow range. Looked at annually, they didn’t go higher than 4.69 percent or lower than 3.65 percent. They have since moved well outside that range. Freddie Mac’s 30-year fixed average was 7.32 percent on October 22, 2026, compared with 6.19 percent a year earlier.
But rates as low as those of the 2010s are incredibly rare. In fact, the annual average never once dipped below 6.0 percent before 2003. And there were 12 long years, from 1979 through 1990, when it didn’t drop below 10 percent. Few would rule out the possibility of rates ever getting back up there.
Chances are, homeowners in the 1980s thought mortgage rates in a 10-18 percent range were the “new normal,” and that they would never see lower ones again. Buyers and homeowners in the 2010s were similarly at risk of seeing those low rates as another new normal. They risked mistaking a prolonged anomaly for an immovable reality.
